International Trade in Online Services

This paper presents an innovative database of domestic and bilateral online services trade between 39 countries, including the US, the EU and some emerging market economies. It combines monetized and “free” online services in a single measure based on the volume of page views on websites of online service providers. We find that the online services market is geographically very fragmented. Less than 1% of all online service providers export worldwide and account for almost half of worldwide online services trade; they are mostly US-based. In the EU and other regions the share of online services imported from the US is very substantial. Conversely, in the US 32% of its online services providers export and these exports account for nearly twice as much as domestic demand. Application of the well-known gravity model of trade shows that trade frictions from geographical distance are greatly reduced in online services. However, cultural and linguistic borders are reinforced and home bias is stronger online than offline. We explain this paradox in terms of online information cost reduction and consumers' quest to explore the longer tail of online supply, both at home and worldwide. Larger firms export to more markets than smaller firms. It is easier for larger online firms to reduce distance and language related trade costs; however large firms do not reduce strong online home bias. Trade costs and home bias vary considerably across services sectors though, in principle, all online services are fully tradable. The export performance of online firms is driven mostly by the comparative advantages of their home country, more so than by their own competitiveness. We conclude with some suggestions for further research